Holcombe 18

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18

CHAPTER

Taxation and Redistribution

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

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Randall Holcombe 18-2

Taxation and RedistributionTaxation and Redistribution

Oer !al" t!e "ederal bud#et #oes to$ardOer !al" t!e "ederal bud#et #oes to$ardredistributionredistribution

%irectl& redistributie 'ro#rams include:%irectl& redistributie 'ro#rams include: Social securit&Social securit&

MedicaidMedicaid Unem'lo&ment com'ensationUnem'lo&ment com'ensation

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Principles of Taxation andPrinciples of Taxation and

RedistributionRedistribution Taxes 'a& "or 'ublic sector out'utTaxes 'a& "or 'ublic sector out'ut

(re)uentl&* taxation and s'endin# 'ursue(re)uentl&* taxation and s'endin# 'ursue

income e)ualit&income e)ualit& +oal o" redistributie 'ro#rams+oal o" redistributie 'ro#rams

Use resources o" some tax'a&ers to im'roeUse resources o" some tax'a&ers to im'roe$el"are o" ot!ers$el"are o" ot!ers

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Equality as a Social GoalEquality as a Social Goal

Motiations underl&in# redistributieMotiations underl&in# redistributie'ro#rams:'ro#rams: Create more income e)ualit&Create more income e)ualit&

Im'roe $el"are o" least $ell o""Im'roe $el"are o" least $ell o""

Redistributie 'ro#rams tar#etedRedistributie 'ro#rams tar#eteddomesticall&domesticall&

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Equality of Opportunity andEquality of Opportunity and

Equality of ResultsEquality of Results E)ual o''ortunit&E)ual o''ortunit&

Eer&one starts $it! same c!anceEer&one starts $it! same c!ance %esire "or #ame $it! "air rules%esire "or #ame $it! "air rules

(air rules(air rules Rules t!at can be a#reed u'onRules t!at can be a#reed u'on

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Goal of EqualityGoal of Equality

E)ualit& o" o''ortunit& is a normatieE)ualit& o" o''ortunit& is a normatie#oal#oal

Man& indiiduals "eel t!at less t!anMan& indiiduals "eel t!at less t!ane)uitable results o" o''ortunit& $arrante)uitable results o" o''ortunit& $arrantincome redistribution 'oliciesincome redistribution 'olicies

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Utilitarian JustificationsUtilitarian Justifications

Social Utilit&Social Utilit& Sum o" indiidual utilities in a societ&Sum o" indiidual utilities in a societ&

Maximi,e social utilit&Maximi,e social utilit& Trans"er income "rom !i#! to lo$ incomeTrans"er income "rom !i#! to lo$ income

indiidualsindiiduals

Social $el"are "unctionSocial $el"are "unction

Utilit& "unction "or societ& as a $!oleUtilit& "unction "or societ& as a $!ole -dmits 'ossibilit& t!at it can be increased b&-dmits 'ossibilit& t!at it can be increased b&

income trans"ersincome trans"ers

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Utility axi!i"ation of T#oseUtility axi!i"ation of T#ose

$east %ell Off $east %ell Off (ocuses on t!ose at bottom o" societ&(ocuses on t!ose at bottom o" societ&

Reco#ni,es disincenties to$ard earnin#Reco#ni,es disincenties to$ard earnin#

income in!erent in redistributionincome in!erent in redistributionsc!emessc!emes

Su##ests taxin# !i#!.income earners andSu##ests taxin# !i#!.income earners andredistributin# to lo$.income earners untilredistributin# to lo$.income earners untilutilit& o" 'erson $it! lo$est $ell.bein#utilit& o" 'erson $it! lo$est $ell.bein#maximi,edmaximi,ed

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C#arity as a Collecti&eC#arity as a Collecti&e

Consu!ption GoodConsu!ption Good /ill be under'roided i" le"t to 'riate/ill be under'roided i" le"t to 'riate

sectorsector

C!aritable +iin# as a Pareto Su'eriorC!aritable +iin# as a Pareto Su'eriorMoeMoe

C!arit& increases standard o" liin# o"C!arit& increases standard o" liin# o"less "ortunateless "ortunate

+iers and reci'ients made better o""+iers and reci'ients made better o""

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'ncenti&e to (ree Ride'ncenti&e to (ree Ride

C!arit& !as some c!aracteristics o" aC!arit& !as some c!aracteristics o" a'ublic #ood'ublic #ood

Potential #iers !ae incentie to becomePotential #iers !ae incentie to become"ree riders"ree riders

Role o" #oernment to oercome "reeRole o" #oernment to oercome "reerider 'roblem and 'roide o'timalrider 'roblem and 'roide o'timalamount o" redistributionamount o" redistribution

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Redistribution as 'nsuranceRedistribution as 'nsurance

-cts as t&'e o" income insurance-cts as t&'e o" income insurance

Partiall& 'rotects 'eo'le "rom !ain# lo$Partiall& 'rotects 'eo'le "rom !ain# lo$

incomesincomes

Premiums 'aid in !i#!.income &earsPremiums 'aid in !i#!.income &earsexc!an#ed "or 'a&ments in lo$.incomeexc!an#ed "or 'a&ments in lo$.income&ears&ears

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Pro)ressi&e Taxation and %a)ePro)ressi&e Taxation and %a)e

Ad*ust!entAd*ust!ent Mar0et ad1ustments to $a#e structureMar0et ad1ustments to $a#e structure

'artiall& o""set redistributie e""ects o"'artiall& o""set redistributie e""ects o"taxationtaxation

More 'ro#ressie tax structure raisesMore 'ro#ressie tax structure raises'retax income o" !i#!.income $or0ers'retax income o" !i#!.income $or0ers Lo$ers 'retax income o" lo$.income $or0ersLo$ers 'retax income o" lo$.income $or0ers

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Pro)ressi&e Taxation and %a)ePro)ressi&e Taxation and %a)e

Ad*ust!entAd*ust!ent

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+istributi&e Go&ern!ent+istributi&e Go&ern!ent

S!i"t o" #oernment s'endin# to$ardS!i"t o" #oernment s'endin# to$ardredistributional 'ro#ramsredistributional 'ro#rams

Increasin# 'ro'ortion o" 'o'ulationIncreasin# 'ro'ortion o" 'o'ulationde'endent on #oernment "or t!eirde'endent on #oernment "or t!eirincomesincomes

More $ort!$!ile "or s'ecial interests toMore $ort!$!ile "or s'ecial interests tolobb& #oernmentlobb& #oernment

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'ncenti&e Structure of'ncenti&e Structure of

Go&ern!ent Pro)ra!sGo&ern!ent Pro)ra!s %o #oernment 'ro#rams do $!at t!e&%o #oernment 'ro#rams do $!at t!e&

are su''osed to do2are su''osed to do2

/el"are 'ro#rams 'roide incenties to/el"are 'ro#rams 'roide incenties toremain unem'lo&edremain unem'lo&ed

Pro#rams create transitional #ainsPro#rams create transitional #ains

-bolis!in# 'ro#rams results in transitional-bolis!in# 'ro#rams results in transitionallosseslosses

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'ncenti&e Structure of'ncenti&e Structure of

Go&ern!ent Pro)ra!sGo&ern!ent Pro)ra!s

A Price (loor

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Redistributi&e Pro)ra!s andRedistributi&e Pro)ra!s and

t#e Poort#e Poor S!ort runS!ort run

Can reduce income o" 'oorCan reduce income o" 'oor

Lon# runLon# runMore di""icult to esca'e 'oert&More di""icult to esca'e 'oert&

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'ncenti&es to Earn $ess'ncenti&es to Earn $ess

'nco!e'nco!e Redistributie incomeRedistributie income

Pa&ments to lo$er.income indiidualsPa&ments to lo$er.income indiiduals

Hi#!er income tax rates "or $el"areHi#!er income tax rates "or $el"arereci'ients i" bene"its lost included inreci'ients i" bene"its lost included inaddition to taxes 'aidaddition to taxes 'aid

Incentie structure encoura#es 'eo'le toIncentie structure encoura#es 'eo'le to

remain on $el"areremain on $el"are Ma& create 'oert& b& creatin#Ma& create 'oert& b& creatin#

'ermanent class o" $el"are reci'ients'ermanent class o" $el"are reci'ients

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Hard,Core Poor and ar)inalHard,Core Poor and ar)inal

PoorPoor Hard.core 'oorHard.core 'oor

Poor because o" in1uries* disease* or disabilit&Poor because o" in1uries* disease* or disabilit&

Mar#inal 'oorMar#inal 'oor Poor because o" lac0 o" education* 're#nanc&*Poor because o" lac0 o" education* 're#nanc&*

economic do$nturneconomic do$nturn

In 'osition to im'roe economic statusIn 'osition to im'roe economic status

+oal o" redistributie 'ro#rams to !el' !ard.+oal o" redistributie 'ro#rams to !el' !ard.core 'oorcore 'oor

Hel' mar#inal 'oor in t!e 'rocessHel' mar#inal 'oor in t!e 'rocess

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Gro-in) +ependency onGro-in) +ependency on

Go&ern!ent Pro)ra!sGo&ern!ent Pro)ra!s /el"are de'endenc&/el"are de'endenc&

Mar#inal 'oor $!o #raduall& become !ard.Mar#inal 'oor $!o #raduall& become !ard.core 'oorcore 'oor

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Politics of RedistributionPolitics of Redistribution

Redistribution 'ro#rams becomin# lar#erRedistribution 'ro#rams becomin# lar#er'ortion o" #oernment3s bud#et'ortion o" #oernment3s bud#et Increases incenties "or s'ecial interests toIncreases incenties "or s'ecial interests to

lobb& #oernmentlobb& #oernment

Establis!ment o" redistribution 'ro#ramsEstablis!ment o" redistribution 'ro#ramscreates $el"are industr&creates $el"are industr&

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Ad!inistrator 'ncenti&esAd!inistrator 'ncenti&es

Bureaucrats !ae incentie to maximi,eBureaucrats !ae incentie to maximi,ebud#ets o" t!eir bureausbud#ets o" t!eir bureaus

Ne#atie e""ect o" #oernment 'ro#ramsNe#atie e""ect o" #oernment 'ro#ramsresult o" rational sel".interests o"result o" rational sel".interests o"#oernment administrators#oernment administrators

Political incenties can cause ine""icientPolitical incenties can cause ine""icient'ro#rams to be "aored oer 'otentiall&'ro#rams to be "aored oer 'otentiall&e""ectie onese""ectie ones

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Goals of RedistributionGoals of Redistribution

In 4555* a "amil& o" 6 $ould !aeIn 4555* a "amil& o" 6 $ould !aereceied 789*555 i" trans"ers e)uall&receied 789*555 i" trans"ers e)uall&diided amon# 'oorest 45 o" citi,ens;diided amon# 'oorest 45 o" citi,ens;

/!& does 'oert& remain2/!& does 'oert& remain2

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T#e Politics of RedistributionT#e Politics of Redistribution

Muc! income redistributed "rom middleMuc! income redistributed "rom middleincomes to middle incomesincomes to middle incomes

Muc! redistribution not tar#etedMuc! redistribution not tar#eteds'eci"icall& to need&s'eci"icall& to need&

Redistribution 'ro#rams sub1ect toRedistribution 'ro#rams sub1ect tointerest #rou' 'ressureinterest #rou' 'ressure

Redistribution 'ro#rams desi#ned t!rou#!Redistribution 'ro#rams desi#ned t!rou#!'olitical 'rocess'olitical 'rocess

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